Fiscal cliff: Positions harden as Democrats, Republicans begin talks

Read this explainer on its economic impact, the most likely scenarios, the biggest political obstacles, and who will be most affected

WASHINGTON — Congressional leaders emerged from a meeting with President Barack Obama on Friday vowing to find common ground on taxes and spending that would allow them to head off a looming “fiscal cliff” that could push the economy back into recession.

Democrats said they recognized the need to curb spending and Republicans said they had agreed to put “revenue on the table” as the two sides enter what are likely to be weeks of tense negotiations ahead of a December 31 deadline.

Both sides are eager to reassure investors that Washington will not see a repeat of the white-knuckle budget standoffs that spooked consumers and financial markets last year.

After a White House meeting that lasted a little more than an hour, the top two Republican leaders in Congress spoke alongside the two Democratic leaders – a rare occurrence.

“I feel very good about what we were able to talk about. We have the cornerstones of being able to work something out,” Senate Democratic Leader Harry Reid said.

U.S. stock indexes went up on the positive remarks by Reid and the other leaders – House Speaker John Boehner, Senate Republican Leader Mitch McConnell and House Democratic Leader Nancy Pelosi.

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The meeting marked the first time Obama, a Democrat, has sat down with his Republican opposition since he won re-election last week.

“I think we’re all aware that we have some urgent business to do,” Obama told reporters at the beginning of the meeting.

Both sides are pledging cooperation even as they dig in on their long-held opening positions.

Obama insists that tax rates on the wealthiest 2% of Americans must rise, while Republicans pledge that they will not agree to any rate increase.

Republicans are also eager to rein in government health costs, which are projected to explode over the coming decade.

“We’re prepared to put revenue on the table provided we fix the real problem,” McConnell said, referring to Medicare and other government benefit programs.

There could be room for compromise.

Obama could agree to allow the top tax rate to rise to something less than the 39.6% he wants. Policymakers, for example, could also agree to limit the tax increase to households making more than US$500,000 annually, rather than the US$250,000 cap Obama is demanding.

Republicans have suggested generating more revenue by limiting tax breaks for the wealthiest, rather than raising their rates. Obama has said that would not raise enough money.

The negotiators also need to confront US$109-billion in domestic and military spending cuts due to kick in on January 2, the result of earlier failures to craft a more nuanced budget deal.

Nonpartisan budget forecasters say failure to reach a deal could push the U.S. economy back into recession and drive up the unemployment rate.

Going over the fiscal cliff, in my view, is a bucket of crazy

Business leaders say the uncertainty is already weighing on the economy as employers postpone hiring and capital expenditures until they get a better sense of the tax and spending environment.

The S&P 500 has dropped 4.3% in the past two weeks, in part due to concerns over the fiscal cliff.

Pelosi suggested two sides might forge a temporary deal that would get them past the cliff and give them more time to work out a more lasting solution. Lawmakers will almost certainly not have enough time to retool Medicare and overhaul the outdated tax code before the end of the year, but a preliminary agreement could provide a framework for doing so later.

“The speaker spoke about a framework going into next year. I was focusing on how we send a message of competence to consumers, to the markets, in the short run, too.” Pelosi said.

Boehner faces a delicate balancing act as he will have to sell any deal to his rank-and-file conservatives, many of whom believe they owe it to their constituents to hold the line on taxes.

But after Obama won re-election and his Democrats picked up seats in the House and the Senate last week, they may be more willing to show that they can balance their ideals with the demands of the country as a whole.

“Going over the fiscal cliff, in my view, is a bucket of crazy,” Republican Representative Peter Roskam, one of Boehner’s deputies, said at a budget conference.